Fitch Ratings has affirmed
The Rating Outlook is Stable. In addition, Fitch has affirmed Element Fleet's senior unsecured debt and senior unsecured credit facility ratings at 'BBB+'. Today's rating actions have been taken as part of a periodic peer review of fleet leasing companies, which is comprised of four publicly rated firms.
KEY RATING DRIVERS
IDR AND SENIOR DEBT
The rating affirmations reflect the firm's position as the largest pure-play fleet leasing and management company in the world, solid asset quality and minimal residual value risk in the portfolio, stable cash flow generation provided by leasing and services and the matched-funding strategy for assets and liabilities.
The ratings also reflect management's progress in executing its strategic, operational and financial plan. Efforts have included reducing Fitch-calculated leverage to the 8.0x-9.0x range, exiting non-core assets, including
Ratings are constrained by Element's relatively high use of financial leverage compared with other leasing companies rated by Fitch, still heavy reliance on secured, wholesale funding sources and Element's syndication activity to manage customer concentrations and to de-leverage, which remains in the early stages.
Fitch believes that the coronavirus will have a modest impact on Element's financial metrics over the medium term, notably asset growth and earnings. Fitch believes that customer-credit risks remain elevated as the continuation of social-distancing measures in the
Fitch's Global Economic Outlook (GEO), published
Over the last two years, management has executed a business transformation plan intended to improve customer experience, drive additional revenue opportunities, and enhance scale efficiencies and operating performance. The transformation plan includes initiatives to manage costs, reduce operating expenses and improve productivity. Of the
The strategy also includes a plan to drive revenue growth through broadening the use of lease syndication, thus creating a source of recurring fee revenue, while reducing balance sheet leverage and mitigating client concentrations. In 1H20, Element syndicated
Asset quality for the core fleet leasing portfolio has been solid since inception, as evidenced by minimal impairments and charge-offs, given Element's focus on large corporate fleets where the clients have stronger credit profiles. Annualized impairments as a percentage of finance receivables amounted to 2.0% in 1H20, which was higher than the four-year average of 0.8% from 2016-2019, given growth in the receivables balance over 120 days past due from a number of struggling clients. Still, impairments do not generally result in credit losses for Element as historic net losses have averaged 0.01% from 2016-2019. This is because the majority of Element's lease portfolio is comprised of open-end leases, which are not subject to residual value risk. The essential business use of the vehicles leased by Element's clients also helps to mitigate the frequency and severity of lessee default. As a result, net losses have been minimal over time.
Element's profitability has been negatively impacted by losses related to the company's non-core operations in recent years, primarily from the investment in 19th Capital. However, on
In its assessment of leverage, Fitch assigns 50% equity credit to Element's
Element is primarily funded by securitizations and a senior unsecured credit facility. In
As of
On
The Stable Outlook reflects Fitch's expectation for the maintenance of solid asset quality performance in the portfolio, consistent operating cash generation, an improvement in earnings, continued economic access to the capital markets and syndication market through various market cycles, matched-funding of the company's assets and liabilities and appropriate leverage for the current rating category, consistent with Element's relatively diverse client base, low loss experience and limited residual value risk.
The equalization of the unsecured debt and senior unsecured credit facility with Element's Long-Term IDR reflects the firm's funding mix and the presence of a pool of unencumbered assets, which suggests average recovery prospects on the notes under a stress scenario.
RATING SENSITIVITIES
IDR AND SENIOR DEBT
Factors that could, individually or collectively, lead to negative rating action/downgrade include significant client departures that negatively affect lease revenues and ultimately core operating cash flow generation, a degradation in the company's competitive position, material increase in losses from client bankruptcies, outsized growth that exceeds internal capital generation or controls and/or a sustained increase in leverage above 9.0x.
Fitch believes the likelihood of a ratings upgrade over the medium term is limited given the challenging economic backdrop from the coronavirus pandemic and Element's higher than peer leverage. However, factors that could, individually or collectively, lead to positive rating action/upgrade include a reduction in tangible balance sheet leverage, as calculated by Fitch, to or below 6.5x on a sustained basis, improved profitability resulting from positive operating leverage and enhanced scale, stability in the syndication strategy and consistent, economic market access over time, an increase in unsecured funding above 40% of total funding and improved management stability.
The senior unsecured debt rating is equalized with the Long-Term IDR and would be expected to move in tandem. However, the senior unsecured debt rating could be notched down from the Long-Term IDR if the level of unencumbered assets decline significantly, thus reducing balance sheet flexibility.
Based in
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Element Fleet Management Corp. LTIDR BBB + Affirmed BBB+
senior unsecured
LT BBB+ Affirmed BBB+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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